For decades, the U.S. enjoyed a peculiar privilege: It owed the world a fortune but somehow still collected more than it had to pay out. The country was effectively able to consistently run up a tab and still walk out ahead.
That trick is now running out, according to economists at the Federal Reserve Bank of New York.
Overseas investors—from national governments and sovereign wealth funds to pensions and private institutions—currently hold nearly $69 trillion in U.S. financial assets, Fed economists wrote in a blog post published Monday. This includes Treasury bonds, S&P 500 stocks, and direct stakes in American companies. U.S. investors, meanwhile, hold $41 trillion in foreign assets. The gap between those two figures comes out to $28 trillion, representing the country’s net international investment position, now deeply in the red.
For a long time, the U.S.’s status as a net debtor didn’t matter much, largely because American investors earned enough on their overseas investments to compensate for the amount the country had to pay internationally to asset-holders. The Fed researchers called this the U.S. “rate of return advantage.” In 2019, for example, the U.S. collected $260 billion more in investment income than it sent abroad.
Over the last few years, however, that surplus—and the exorbitant privilege the U.S. had as a net debtor—has effectively evaporated, as net incomes have hovered close to zero for the past two years, according to the Fed. The culprits are varied, ranging from booming U.S. asset valuations and rising interest rates, but the result is the same: Larger and larger amounts of capital are leaving the U.S., and domestic investors are now barely breaking even on those losses with their overseas bets.
No longer an advantage
Every country holds an international balance sheet—the difference between the overseas assets owned by citizens, companies, and the government, and the amount of domestic assets owned by foreign investors. Being in the negative makes a nation a net debtor, which usually means faster capital outflows and a depreciating currency.
The U.S. has long enjoyed a competitive headstart when it comes to its international balance sheet. As far back as 2004, when the U.S.’s net liabilities abroad came in at $2.4 trillion, net investment income was $36.2 billion, according to the Congressional Budget Office, softening the balance sheet hit.
The CBO attributed the U.S. advantage to multiple factors, including the likelihood that U.S. subsidiaries abroad are more established and profitable than international firms operating in the U.S., and that American investors tend to manage more risk overseas and consequently seek higher returns.
The rate of advantage helped mask the growing gap as foreign investors kept buying up U.S. assets, but that hole has now turned into a gaping gulf. Since the end of 2019 alone, the deficit has grown by an extra $16 trillion, according to the Fed researchers, who pointed at two economic forces in particular driving the deterioration of the U.S. net investment position.
The first is chronic trade deficits. When the U.S. imports more than it exports—as it has done persistently for more than 50 years—the difference has to be paid for somehow, usually by selling assets. Since 2019, U.S. investors have purchased only around $6 trillion in foreign assets, compared to overseas buyers snatching up $11 trillion in value, meaning the deficit alone sapped $5.5 trillion from the U.S. net position.
The second force is one that has come to benefit many domestic as well as international investors: America’s own booming stock market. Higher equity prices inflate the estimated value of foreign-held U.S. assets—and since foreigners own a massive chunk of the American stock market, each bull run only widens that gap. Foreign ownership of U.S. stocks and equities is currently at a record high, with around 18% of the stock market in international hands as of last year, according to Apollo chief economist Torsten Slok.
Since 2019, valuation changes on the market have scratched another $10 trillion from the U.S. net position, according to the Fed.
A familiar foe
The accounting was tolerable for most of the past 20 years. But the country’s international balance sheet might yet be taken down by the same adversary that has complicated finances for holders of all kinds of debt.
The Fed’s post-pandemic rate hikes have transferred into higher payments on everything from car loans to mortgages. They have also quietly disrupted the once-comfortable state of the U.S. international balance sheet. Around $26 trillion of U.S. assets owned by foreign investors are of the interest-bearing type, including cross-border bank loans, securities, and foreign deposits. The problem for the balance sheet is that higher rates translate directly into higher outflows, with the Fed researchers finding that around $170 billion of the extra $240 billion the U.S. has made in net payouts since 2021 comes down to higher interest rates
The Fed calculated that every one percentage point increase in rates constitutes a subtraction worth $150 billion from the U.S. net income balance. That exposure grows the bigger the debt load is, as the same monetary policy tweak five years ago would have cost only $100 billion. The result is more capital flows leaving the U.S., and an economic problem that becomes increasingly intractable.
“Profits, dividends, and interest payments that would otherwise accrue to domestic investors instead flow abroad. Given the need to sell U.S. assets to finance ongoing trade deficits, this servicing burden seems likely to mount,” the researchers wrote.
The U.S. has long sold its financial assets to the world in exchange for goods it wasn’t producing at home. The bill is now coming due, and American investment genius overseas might not be enough to make up the difference anymore.
